Pitfalls of shorting

Shorting is better to be avoided for most:

·         Could lose more than 100% of the investment.

Actually, in theory, there is no limit. If the shorted stock price rises by 10 times, the loss is well over 10 times money invested.

·         Need to pay dividends and interest for the shorted stock.

The higher the dividend rate for the stock, the more you have to pay. The experienced would avoid high-dividend stocks to short.

Need to pay interest for ‘borrowing’ the stocks to sell. Brokers charge interest rates differently and it could be a huge saving to shop around if you short stocks a lot.

·         Need both fundamental and technical analyses.

From my experience, a technical analysis is more important in shorting.

·         If successful in shorting, gains are subjected to the short-term capital gain taxes which are typically higher than long-term capital gain taxes.

·          Not all the stocks can be shorted.

·         Selling short is not allowed in retirement accounts as of 2013. However, you can buy contra ETFs for a group of stocks to bet against the market or a sector, but not on a specific stock.

·         The following sectors are riskier: the drug, mine, bank (unless you know the quality of mortgages) and insurance sectors. A single drug approval could drive the stock price up by more than 25% in one day.

·         There is no perfect timing. Some stocks fluctuate a lot with no rational reasons. Some stocks may be manipulated.

Writing put options is similar to shorting a company with more advantages than disadvantages.

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My e-book Debunk the Myths of Investing could save you a lot of money in investing. The above is one chapter out of 105 and some important chapters will not be included in the blog.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

Muni bonds

Unlike the Federal government, states and munis do have to balance the budget and we are getting more cities bankrupt than previously predicted. We have to bite the bullet somehow otherwise we can never service our growing debts. We're running out of suckers like China to lend us more money.

As of 7/2012, most likely the following will happen.

·         States will not bankrupt, but muni bonds will lose a lot of their values. QEn will be used to rescue the state. Property and state taxes will be raised if not already been raised. A lot of foreclosures usually means less local taxes for the local government.

·         State/muni bonds together with Federal bonds will have the junk status, so in the future it is harder to raise money that is needed for any public project.

·         Cut state employees.

It is easy to cut about half of the state workers and you will not notice any loss of service (as most of them work short hours and are not motivated under the union umbrella). I just get sick of the routine 'discoveries' on how few hours they work as reported by our newspapers while we've about 18% real unemployment / under-employment rate.

However, the firemen, policemen, and teachers should be paid fairly and they should not be cut.

·         Cut their pensions and increase retirement age requirements. Most state workers have just a little less than their regular salaries and they retire at a young age. Most big companies do not have pensions now. Many of them work for the state government as they cannot find jobs in the industry, or they get the job due to their political connection.

·         Cut the entitlements/benefits that encourage folks not to work like benefits to teenage mothers. Cut the free medical care to illegal aliens. All expenditures have to be a fair percentage of our GNP not how much we can borrow and how important for buying votes.

·         We do not need large government, but lean and mean government to provide us efficient services. All those taxes are not good for the economy and businesses (how can you compete with those foreign countries with minimal taxes). Without business expanding (not government expanding), we do not have real jobs.

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Afterthoughts.

·         We need to set up a law to require the federal government to balance the budget and not to be the world policemen which we cannot afford.

·         Our experts told us to stay away from munis. They're wrong in timing – well you do not want to fight the Fed in the short term. However, their arguments are not wrong. Muni government seldom default their bonds as they cannot issue new bonds in the future if they do.

The reality is: Some municipals are just dying and they just cannot keep up paying the interest expenses and obligations. There are better places to invest.

·         As of 8/2012, the defaults of muni bonds are getting more. It should be even more as more defaults in the unrated bonds, which are not tracked by the rating agencies. As the original post written about a year ago, the advice still holds. There are better investments than muni bonds with the low interest rates and the risk of defaults.

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My e-book Debunk the Myths of Investing could save you a lot of money in investing.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

How to prepare a correction

First we need to define a correction: It is a temporary dip (about 5 to 20% down) but not a recession that would drag on longer and would lose more than 25% in the first year. Every one’s preparation is different. Basically you want to accumulate cash now by selling stocks before the correction and pick up stocks during and after the correction.

What should be done preparing before a correction? I summarized here what I did in my 5/19/2011 blog. It worked that time, but there is no guarantee it will work again in the future. However, what I did is a good list to prepare for a correction.

1.       Accumulated cash.

I halted buying any stock and had been selling stocks for several weeks since 5/19/2011.

2.       Prepared the buy list when the correction was almost over:

2.1    The good (from my previous analyses) stocks that performed reasonably well but would be down due to the correction

2.2     The stocks that had performed very well recently even they're not classified as good stocks in my analyses.

2.3    Stocks in my previous buy list that had lost a lot of value - very careful here as the bad stocks could go to 0. Ensured they had a good chance to recover.

2.4    If you cannot find enough stocks to buy, try ETFs like SPY.

2.5    Screened some deeply-valued stocks for bottom fishing.            

My logic is that if the stocks have performed well and they plunge due to the correction, they will climb back after the correction.

3.       Bought contra ETFs and stocks at reasonable discounts.

I usually place buy orders 3% less than the market prices if I assume the correction is 3%. If your buy prices are too far away from the market prices, most likely your buy orders will not be executed or you buy some stocks that the fundamentals have been worsened.

4.       Sold covered calls for some stocks I already owned. Not all stocks are good candidates for covered calls (Chapter 64).

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My e-book Debunk the Myths of Investing could save you a lot of money in investing.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.

Switching to boost performance

I've one switching between Growth and Value every month. The following from a fellow blogger will be examined when I have time.

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Quarterly switching based on the performance in the prior quarter yields a CAGR of 12.95% during 2009-2012 based on S&P index data.

Quarterly switching based on the performance in the immediately prior month yields a CAGR of 22.48% during 2009-2012 based on S&P index data.


Similar improvement occurs with the actual ETFs - SPLV and SPHB. (The 2012 return is doubled if you use the prior month's performance rather than the prior quarter's.)

The best performance is obtained if you switch monthly, and include TLT in the mix: over 31% with the S&P index data (2009-2012) as well as with the actual ETFs during 2012-2013.

By the way if you just want double the S&P 500 returns, you do not need to do this much work. For example, an yearly rebalanced equal weight portfolio of MIN, MMT, and BKT returned much higher than double the S&P 500, with risk of only 15% during 1991-2013.

My Coconut Theory

Coconut Theory

In a tropical island, every one sleeps under a coconut tree. He wakes up only when a coconut falls on his head once in a while. He eats the coconut and goes back to sleep. He is lazy due to the nice weather (no need to find shelter) and the nice resource (the coconut tree). He is happy and rich by his own standard. However, he is lazy, fat, and stupid due to the lack of any need to work, exercise, and think out of his ‘perfect’ environment.

The worst that happens to the natives is borrowing coconuts from other natives with the coconut tree as collateral or cut down the coconut true to make a canoe without plans on how to replenish coconuts in the future. 

This is a simple theory. It can be used to explain how and why many countries are rich, poor, and continue to be so. Let’s check how this theory stacks up with countries.

U.S.A.

The U.S. is the richest country due to its developed and highly educated citizens, hard-working immigrants and the huge natural resources per capita (i.e. having a lot of coconuts in my theory). The U.S. is declining as we spend more time enjoying our wealth (on credit – living beyond our means!) rather than creating more wealth (i.e. eating up most of the coconuts and not planting new coconut trees in my theory). 

The wealth is equivalent to the bountiful of coconut trees that were available originally and the many that were planted by our ancestors. There were fewer natives to consume the total number of coconuts, so there was a surplus of coconuts grown, eventually to be given away (as welfare and entitlements).

Because of WW2, most coconut trees in the world were destroyed while ours were fine. We were rich to ship our better coconuts to the rest of the world.

God gave us natural resource, good soil and climatic wealth (coconuts hidden under the sand) and hopefully we continue to be wealthy.

Norway

Norway is the richest to its size group (3 millions) while Brunei is richest in its own category. Norway has more money than God because of its intelligently governed oil wealth, so everything works better there. I hate to compare any country to Norway as most likely we are comparing Apples to Melons.

From its long coast line Norway has rich off-shore oil fields and abundant fish exports which is second in the world-- only 6% of its export, after China but far, far #1 per capita wise. Because of the world's oil addition and food dependence secures its income flow.

Peru has a long coast line, but it is not wealthy. My theory does not apply fully here, as there are exceptions. It could be Norway’s educated citizens, close location to its trade partners and buying assets around the world. The dividend payments allow Norway to prosper for decades. They have about 600 billion sovereign fund to be shared by 3 million citizens. Simple math!

Iceland

Some smart guys suggested cutting down all the coconut trees to make canoes so they can earn a rich life by fishing. The world loans them with coconuts. When the fishing fails, their land is lost with no coconuts and no coconut trees left. Do not bet all the coconuts in one venture.

Singapore and SE Asia

Singapore is rich due to its important location for the sea route for trade and commerce, as well as being the cultural intersection between the east and the west and its industrious citizens (most are Chinese). When the hard-working folks land to a land of coconuts (i.e. resources), they are natural to be rich.

Mekong River is a good resource providing fishing, irrigation, transportation, and fertile land in the delta for SE Asia. Hence, SE Asia should be rich, and at the same time attract hard-working immigrants from India and China to enhance their wealth.

Japan

Japan has few natural resources. Its only resource is the educated and hard-working citizens. With a decreasing population and the policy not welcoming immigrants, Japan will face problems.

Ancient civilizations 

Greece, Iran, India, China and Italy are among the oldest civilizations. Most do not do well in today’s economy and many of their citizens have immigrated to other countries. My theory suggests that they have exhausted their coconuts (farm land and metals) throughout the long history. Hence, they have to migrate to lands with more coconuts.

To illustrate, there is a huge discrepancy in natural resources (oil, metal and farm land) between China and the U.S., which has a relatively short history.

Haiti

Haiti used to have enough coconuts for its small population. French imported African slaves to the sugar cane plantation and changed the allocation of natural resources per capita. Coupled with frequent natural disasters and mal government, Haiti becomes the poorest country in the world.

UAE

When the west helped UAE to explore its oil resources (the hidden coconuts under the sand) about 50 years ago, UAE becomes the richest country on earth. She expands in different areas and it could be over-expanded. When the oil dries up in 100 or so years and/or the shale energy competes better, they could be in big trouble.

Corporations too

Microsoft was a tougher company with more innovations fifteen years ago. However, they are enjoying easy profitability of upgrades of Windows and Office (coconuts planted by their ancestors). For a long time, she only has one successful new product, the Xbox. Her managers are counting their bonuses (coconuts) instead of taking risk. The Coconut Theory works again.

Rich families too

It is very rare to have rich families that last over three generations. The first generation grows the wealth (planting coconuts), the second generation enjoys the wealth, and the third or fourth generation usually becomes poor due to the easy life.

Conclusion

So far, no one tells me that this theory has been ‘discovered’ by others. Shamelessly I claim it is mine. To me, it is just common sense. Disclosure: I have not taken any class in economics, so I may be talking turkey.

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My e-book Debunk the Myths of Investing could save you a lot of money in investing.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.